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Oil Aplenty: Debunking the Peakniks

Nansen Saleri, former head of reservoir management for Saudi Aramco, debunks the peakniks in the WSJ:

The world is not running out of oil anytime soon. A gradual transitioning on the global scale away from a fossil-based energy system may in fact happen during the 21st century. The root causes, however, will most likely have less to do with lack of supplies and far more with superior alternatives. The overused observation that “the Stone Age did not end due to a lack of stones” may in fact find its match.

The solutions to global energy needs require an intelligent integration of environmental, geopolitical and technical perspectives each with its own subsets of complexity. On one of these—the oil supply component—the news is positive. Sufficient liquid crude supplies do exist to sustain production rates at or near 100 million barrels per day almost to the end of this century.

Technology matters. The benefits of scientific advancement observable in the production of better mobile phones, TVs and life-extending pharmaceuticals will not, somehow, bypass the extraction of usable oil resources.

Comments

I’m afraid you might have to include Warren Buffett in the Peak Oil camp…

BUFFETT: Well, ag commodities are a little tough. You know, if I had to on—where ag commodities would be three years from now, up or down, I wouldn’t know which way to bet. But they look like they’ve had quite a run. But if you take something like oil, I mean, we have been sticking straws in the ground now since, what, Titusville in 1850-something with Colonel Drake. And we have—we have—we have found a lot of the oil that’s to be found. And if we’re going to produce—or use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the—in the—in the next five or 10 years, we’re going to have—we’re going to have a tough time maintaining production that satisfies those at this price, even. So I think something like oil, six and a half million humans—or six and a half billion humans are going to use a lot more oil than a lot fewer used 20 years ago or 30 years ago.

Buffett has a cent or two to rub together doesn’t he? I believe he has some kind of reputation as an investor.

Posted by .(JavaScript must be enabled to view this email address) on 03/04 at 08:15 AM

Cambridge Energy Associates forecasts the global daily liquids production to rise to 115 million barrels by 2017 versus 86 million at present. Instead of a sharp peak per Hubbert’s model, an undulating, multi-decade long plateau production era sets in—i.e., no sudden-death ending.

A multi-decade plateau might happen, but it sure as hell won’t be at 115mpbd (we’ll be lucky to crack 100mpbd) and it sure as hell won’t be comprised of conventional crude which topped out at ~73mpd years ago. It will have to be tar sands, CTL (and won’t that go down well in a carbon-constrained world!) and biofuels, all equally unlikely.

Posted by .(JavaScript must be enabled to view this email address) on 03/04 at 09:37 AM

Buffett is a notorious Malthusian.

Most peakniks are themselves current or former oil industry professionals. They know their oil, they just don’t know their economics.

Oh yeah, they missed the bit where high oil prices will magically create more oil.

Or perhaps the bit where an alternative will be found to an energy dense fuel, that’s stable across a wide range of temperatures and pressures, and literally gushed out of the ground for free for 100 years.

Or perhaps the bit where environmental and ecological damage is simply not priced, which meshes nicely with climate change denialism, so you can conveniently ignore it.

Economists say the invisible hand will provide. We can’t tell you how, we can’t you when, but we know that it will.

You accuse peakniks of being part of a cult, but that sounds awfully like a faith and not a science to me.

Posted by .(JavaScript must be enabled to view this email address) on 03/05 at 02:38 AM

That is exactly the point: markets do not require perfect foresight, which is why they are such an effective and reliable long-run adjustment mechanism. The reason we do not worry about shortages in other commodities, goods or services is that we expect the price mechanism will work.

What if human ingenuity fails to come up with a substitute for oil at anything like the current price, or in a timeframe that allows our society to transition to another transportation technology without serious implications for our civilisation?

We’ve built everything on oil. Nothing works without it. Not agriculture, not trade, not building, not mining, and certainly not transportation.

There is a lot at risk here, and I am uncomfortable (to say the least) with an answer that says: “we expect the price mechanism will work”.

Posted by .(JavaScript must be enabled to view this email address) on 03/05 at 04:10 AM

Buffett is a notorious Malthusian

Do you have some references for this ?

(I’m not doubting you, I’d just like to read up on it)

Oh - I guess I should note that I wouldn’t take an Aramco executive’s word on peak oil - if you don’t trust the peak oilers who come out of the oil industry, why do you trust someone from Aramco ?

Given enough incentive, human ingenuity will solve any problem resulting from resource depletion. The most efficient way to solve these problems is for government to get out of the way and let the price mechanism do its work.

If so, would I also be correct in assuming you would support the removal of the fuel excise, so that all goods and services are taxed at the same (but perhaps higher) rate? If that policy were to be implemented tomorrow, what effect would that have on Australia’s consumption of liquid fuels and growing petroleum deficit?

Posted by .(JavaScript must be enabled to view this email address) on 03/05 at 09:46 PM

Ahhh ... John Humphreys of course. You’ll get on well with Big Gav then, he’s both a libertarian and a peak oiler.

Remarkably we agree on most points. I agree that “the market is better at picking winners than politicians and bureaucrats”. I agree that a carbon tax is preferable to emissions trading. I agree that broadening environmental taxes is a good idea, but I have a real problem with with this:

This would result in an effective reduction of 75% in the fuel levy, which would lead to a reduction in petrol prices by about 30 cents per litre, and help to offset recent high petrol prices.

For reasons mentioned above I believe oil is a unique resource that for many applications has no substitute on the horizon (e.g. aviation, shipping). It is fundamental to the continued functioning of our civilisation and therefore should be treated differently by the tax system.

(I’m clearly not alone in this view, because pretty much every developed nation taxes liquid fuels heavily)

Like it not, the fuel excise is what we’ve got, and its been in place for a very long time. Anything that lowers fuel prices is sending precisely the wrong message to the market at a time when the cost of the producing the resource is clearly increasing, and in all likelihood will continue to do so.

If fuel prices dropped 30c/L tomorrow, Australia’s oil consumption would increase substantially, and our petroleum deficit would blow out considerably. Is this sensible policy when we know that the drop in fuel prices would almost certainly be temporary?

Realistically, I think we have to hold the fuel excise where it is, and phase in carbon taxes until the per tonne carbon tax is at least equivalent to the existing fuel excise.

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 12:12 AM

Hang on, DavidM. How can you argue that a petrol price that reflects the putative costs of the associated carbon emissions is too low? The market price of any commodity already reflects its relative scarcity arising from its degree of substitutablity, etc. If demand for a good (eg oil) is relatively inelastic, it may be efficient from a revenue-generating perspective to tax it by more than necessary to reflect negative externalities. This is why many countries impose high fuel taxes. But that is wholly different from saying that efficiency necessitates a higher price than an externality-adjusted market price.

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 03:19 AM

The market price of any commodity already reflects its relative scarcity arising from its degree of substitutablity

Does it? Does the market perfectly predict future supply shocks? Did the oil market anticipate the peaking of U.S. oil production in the late 1960s? Did it anticipate future vulnerability of the western world to Arab oil cartels and mid-east tensions?

I am not suggesting we tax liquid fuels at a higher rate than other sources of carbon emissions for efficiency’s sake, I’m suggesting we do it to reduce our vulnerability to future supply shocks.

If we reduce the fuel levy now by 30c/L Australia would have the lowest fuel taxes in the developed world. I ask again, is that sensible policy as the era of cheap oil draws to a close?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 04:57 AM

So you lied when you said that you believe “the market is better at picking winners than politicians and bureaucrats”?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 05:03 AM

So you lied when you said that you believe “the market is better at picking
winners than politicians and bureaucrats”?

It was a white lie :)

Put it this way, I don’t think the government should be subsidising solar PV on rooftops, investing in “green cars”, or funding solar thermal powerstations in the desert. I’d much prefer a carbon tax was phased in with commensurate reductions in income (and other) taxes

However, I do believe oil is a unique commodity, and the market has a poor record of anticipating supply shocks in the past.

Ok, I answered your question, how about you answer mine. Is it sensible policy for Australia to be reducing its fuel taxes by 30c/L now? Yes or no.

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 05:30 AM

That’s a difficult question, because demand for fuel is relatively inelastic. In other words, a tax on fuel is probably a more efficient means of raising revenue than taxes on income or on many other goods and services. So, the question is really about the harm caused by the over-taxing of fuel compared with the harm from taxing something else. But leaving that aside, I certainly don’t think there is anything inherently wrong with taxing fuel only to the extent necessary to reflect the externalities arising from its consumption. Ask yourself if your concern about how consumers might respond to such a price fall is because they might not share your views on the future of the oil price. In which case, what makes you so much better informed than them (ie the market)?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 05:45 AM

Jeez, never ask an economist for a yes or no answer!

Come on, Humphreys is suggesting an across-the-board carbon tax in place of the existing fuel excise. Do you support his proposal, yes or no?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 06:00 AM

No, but only because I don’t believe we should act on greenhouse without a binding multilateral agreement. With such an agreement, I would support it.

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 06:09 AM

So you won’t lower fuel taxes until the rest of the world has committed to reducing carbon emissions?!

I can see the headlines now: “New global climate treaty signed. Australia slashes fuel taxes by 30c per litre”. How would that play in diplomatic circles?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 11:30 AM

The EU has had some success at curbing the growth of emissions from the electricity generation sector, but even with the highest fuel taxes in the world, they can’t keep transport emissions from growing.

Do you think the Europeans should also slash fuel taxes?

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 12:05 PM

So the topic has now moved on from oil shortages to greenhouse abatement policies? DavidM, I really think you might benefit from studying economics before/instead of bagging it. The question is really whether the carbon tax is set at a level that reflects the true negative externalities of its consumption (which may change over time). If it does and consumption of say, fuel, continues to increase regardless, that implies that consumers value the product more than the full social cost of its consumption. Hence, the increased consumption is welfare-increasing (ie efficient).

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 11:12 PM

So the topic has now moved on from oil shortages to greenhouse abatement policies?

Oil shortages and greenhouse abatement are intertwined and interrelated problems. We cannot “solve” shortages of conventional crude with oil sands, shale, CTL and the like in a carbon-constrained world.

Thanks for the put down. Not all economists agree with your view:Hitting the ‘non-existent’ limits
Limits to growth! Blasphemy! Strike thee from the high church of the economists!

The question is really whether the carbon tax is set at a level that reflects the true negative externalities of its consumption (which may change over time).

Fine, if you consider the negative externalities to be </i>just</i> carbon emissions and likely negative effect on the climate. I am suggesting there is a looming supply crisis that is not priced into the market (I know it is heresy to say so) and by lowering fuel taxes now we are creating a moral hazard. Australians have already been insulated against the rising price of oil by the super strong Australian dollar, and the government’s decision to end fuel excise indexation in 2001.

If it does and consumption of say, fuel, continues to increase regardless, that implies that consumers value the product more than the full social cost of its consumption.

And I am saying consumers do not understand the full social cost of its consumption.

Posted by .(JavaScript must be enabled to view this email address) on 03/06 at 11:39 PM

In other words, as we established some time ago, your argument comes down to your belief that you know better than the market. How simple life would be if certain individuals could be trusted to consistently know better than everyone else.

Posted by .(JavaScript must be enabled to view this email address) on 03/07 at 01:56 AM

How simple life would be if certain individuals could be trusted to consistently know better than everyone else

Its a cross I have to bear.

Governments have come to the conclusion that the negative externalites of carbon emissions should be priced. Does that mean government (and those pesky climate scientists) know better than everyone else?

How dare they interfere with the purity of the market! Don’t they know its more important than maintaining a habitable planet and a viable civilisation?!

Posted by .(JavaScript must be enabled to view this email address) on 03/07 at 02:04 AM

Externalities such as GHG emissions reflect a market failure in terms of a lack of property rights, whereas what you’re talking about is a presumed market failure arising from your supposedly superior information about the future supply of oil.

Posted by .(JavaScript must be enabled to view this email address) on 03/07 at 02:15 AM

whereas what you’re talking about is a presumed market failure arising from your supposedly superior information about the future supply of oil.

Agreed ... and it wasn’t so long ago that GHG emissions were a “presumed” market failure as well. John Howard and George Bush were certainly unconvinced until recently.

You tell me. Can the market operate effectively when information about future oil supplies comes out of the nationalised oil companies of Saudi Arabia, Russia, Iran, Iraq, Nigeria and Venezuela? Are you telling me we’re getting all the information we need about this critical issue? Would these countries tell us if they were unable to maintain supply beyond (say) 2015?

No-one has a friggin’ clue exactly where oil production is going. Estimates range from “oil production has already peaked” from the peakniks, to “120 mbpd by 2030” form CERA, Yergin et al ... and Yergin has been dead wrong about oil prices and production every year since 2002.

Posted by .(JavaScript must be enabled to view this email address) on 03/07 at 02:54 AM